Confidence Game - Christine Richard [140]
Citigroup was rumored to be leading the bailout. That wasn’t too surprising given that of Ambac’s $22 billion of CDOs backed by subprime mortgages, nearly $7 billion of the worst-performing securities had been underwritten by Citigroup.
ACKMAN HAD BEEN trying to speak with someone at Citigroup all week. On Sunday, February 24, he drafted an e-mail to Vikram Pandit, the CEO of Citigroup; Brian Leach, the chief risk officer; and Robert Rubin, the former secretary of the Treasury and now an adviser to the bank. “Last week I attempted to reach Vikram,” the e-mail began. “Vikram’s secretary called and said that Brian would return my call. Having not heard from Brian, I attempted to reach Brian by phone and e-mail. Neither my call nor my e-mail was returned. I have therefore concluded,” he wrote, “that Citi may be making the same mistake that Warburg did with MBIA, namely making an investment without adequate due diligence.”
Since no one was picking up the phone at Citigroup, Ackman would summarize his views in the e-mail. “While $3 billion may be sufficient to stop some of the rating agencies from downgrading Ambac Assurance today, continued downgrades and losses on the underlying exposures will likely require substantial additional capital,” Ackman continued. The figure was inconsequential when compared with Ambac’s more than half a trillion dollars of outstanding exposures, Ackman added.
He advised the three men to think carefully about the type of investment they were rumored to be considering in Ambac. A backstop—or an agreement to buy up newly issued shares if there was insufficient market demand—would likely induce other equity investors, including a large number of retail investors, to invest alongside Citigroup. “If the investment works out poorly, as we anticipate that it will, there are significant reputational consequences for Citi that should be considered,” Ackman wrote.
It wasn’t the first time that week that Rubin had heard from Ackman. Several days earlier, Rubin had given an informal talk for parents and faculty at a school on the Upper East Side. When Rubin offered to take questions from the audience, Ackman—seated in the front row—put his hand up immediately. Before Ackman had a chance to ask his question, Rubin responded, “Bill Ackman! Let me guess. It must be about the bond insurers.”
“No, actually it’s not,” Ackman said. What he wanted to know was whether Rubin, “as a member of the board, a smart guy, and the former head of Goldman Sachs,” was able to understand the kind of risks Citigroup was taking.
No, Rubin told him, he was not. He didn’t elaborate. Nor did he provide any insights on the Ambac bailout.
The great game of risk transfer had gone on for years on Wall Street, enabling ever more lending, reducing bank capital requirements, and generating big fees. The whole business had always been a bit too good to be true. Now, the gamesmanship in one company bailing out another so it could bail out the first was stunningly obvious.
ON MONDAY, FEBRUARY 25, the market got a reprieve. Standard & Poor’s announced that both MBIA and Ambac had passed the credit-rating company’s updated stress test. Their triple-A ratings were affirmed.
“This dose of optimism for a narrowly averted wave of monoline downgrades could go a long way to restoring capital market confidence in the near term,” Lehman Brothers Holdings analysts led by Jack Malvey in New York said in a report issued to clients.
“It’s all in Moody’s court now,” Jim Bianco, who runs a bond consulting firm in Chicago, told Bloomberg Television News.
It didn’t stay there long.